Hedging Strategies with Gold in Reducing Index- Based and Sectoral-Based Equity Portfolio Risk

Abstract

Research Question: This study examines the effectiveness of gold as a hedge in portfolios with NASDAQ-100 and sectoral ETFs during market stress to determine its ability to reduce risk. Motivation: Gold is widely recognized as a safe-haven asset during periods of market volatility, yet its effectiveness in portfolios containing NASDAQ-100 and sectoral ETFs under financial stress remains underexplored. Considering recent market disruptions, such as the COVID-19 pandemic, the war in Ukraine, and energy market fluctuations, understanding how portfolios can be stabilized is essential. This study provides investors with practical, evidence-based insights on strengthening portfolio resilience and enhancing risk-adjusted performance. Specifically, it addresses the research question of whether gold can effectively reduce portfolio risk and improve hedging efficiency during market crises. Idea: The study proposes examining how adding gold influences portfolio behaviour in NASDAQ-100 and sectoral ETFs during periods of heightened market stress. It focuses on identifying whether such inclusion reduces portfolio volatility and provides stability across different sources of financial disruption. Data: The analysis uses daily closing prices for gold, NASDAQ-100, XLE, and XLF from January 2020 to April 2025, covering approximately 1,350 observations, obtained from the Stooq platform. Tools: Econometric modelling and volatility analysis were conducted in EViews. The methodological framework includes descriptive statistics, correlation analysis, GARCH volatility modelling, rolling correlations, and portfolio metrics such as the Hedge Effectiveness Index, Sharpe ratio, and minimum variance portfolios. Findings: The results indicate that gold consistently exhibits low volatility and tends to negatively correlate with NASDAQ-100 and XLF during stress periods, confirming its safe-haven properties. XLE shows more mixed correlations due to its sensitivity to energy markets. These patterns highlight gold’s potential as a stabilizing component in diversified equity portfolios and suggest practical implications for investors seeking to mitigate risk during periods of heightened market uncertainty. Including gold, which shows low volatility and negative correlations with key indices, reduces portfolio risk and enhances investors’ resilience. Contribution: Overall, the findings show that including gold in portfolios can reduce overall risk, enhance risk-adjusted performance, and provide investors with a practical tool for managing uncertainty.